‘M&A’ is the hot buzzword in corporate law – it is supposed to be the ‘bread and butter’ of corporate law firms. Law firms want to work on the most big-ticket M&A deals. As a young associate, you want to have the opportunity to get cracking on such transactions. When you are interning in a corporate law firm or learning corporate law, M&As is what you want to master immediately – it sounds ‘cool’. Other things can take a back seat, but when you’re thinking of corporate law, M&A cannot. So let’s identify how you can really make your M&A capabilities as a deal lawyer shoot up phenomenally.
There is very little practical literature available on M&As for a young lawyer. If you refer to a corporate law textbook written by an Indian author, Section 394 (new Section 232 of the Companies Act, 2013) is what takes prominence. Many law students think that the world of M&As begins and ends with this provision – don’t fall into that trap. Section 394 deals with Court-approved mergers and is relevant for merely 5–10 percent of M&A transactions. These are transactions between companies within the same corporate group (i.e. where there is common control by a parent), so approvals from shareholders, minimizes risk of objections from lenders and also the court are easy to obtain. There are books on economic theory behind mergers abound, but that little on how to add value to clients as a commercial lawyer. American textbooks explain how forward and reverse mergers work – but this concept is popular in American law (where mergers are contractual and not court-approved) – you will never hear these terms being used in Indian law firms.
Most M&A transactions are not Section 394/232 transactions and do not depend on court approval. You are likely to have come across the ‘Takeover Code’ during your research, while reading a business newspaper or in internship, which is more relevant. Once again, unlike what most young lawyers who spend a lot of time reading up or working on Takeover Code, the world of M&A does not stop here either, as the Takeover Code only deals with acquisitions of listed companies.
Corporate lawyer’s role in M&As
What is a corporate lawyer’s work on M&As? The business teams will be extensively involved in creating initial elements of the deal and deciding what percentage is to be acquired, in consultation with professionals –investment bankers, accountants and law firm partners. For a young lawyer, the work is focused on execution of the structure – this can get incredibly difficult if a transaction has multiple legs. Largely, the work is focused around preparation of transaction documents (various contracts which define the commercial relationship between the parties), announcements under the Takeover Code, filing approval applications with regulators.
Further, due to the complexity of the transaction, a lot of these actions will require coordination with an internal team of the client – so there will be significant exchange of written communication. This is not SMS or email communication and several individuals from different organizations who are working on the transaction will read what you write (it can also potentially be used against you if you provide insufficient or incomplete advice) – so you have to be careful to communicate accurately.
How simple tasks become complex in M&A transactions
I will give you a simple example which can enable you to appreciate the nature of work. Imagine 100 tasks have to be divided amongst 5 people. Imagine going through 20 legislations and 5 contracts to identify who has to do which task and by what time. It will be a lot of hard work, and doing it effectively will require you to be very meticulous. The tasks required to be done while working on an M&A transaction (and a lot of other work in a corporate law firm)are of this kind, such as preparation of step charts, requisition lists, etc. will require these skills. Contrary to popular perception, this is not low-level work and can be quite difficult. All this is vetted by the partner or the senior associate. You mess up even one entry, and there can be severe consequences for clients, which is why mistakes in the document will make clients pull up and lambaste the law firm for its carelessness. Your senior will give you a good hearing for it. Hence, one has to be very careful while working on them. This is what associates in top corporate law firms spend time learning in their initial months, before being given advanced tasks.
What you can learn beforehand
Getting the big picture is very important so that you can work on the small parts. For example, an investment transaction can be a strategic investment or a financial investment. A strategic investment involves a high degree of management control, as compared to a financial investment where very limited rights are taken to ensure that the investment is protected. A joint venture will involve some level of joint control (imagine having two captains to a ship). A buyout on the other hand involves substantial acquisition of shares of the seller. In this chapter, we will provide some idea of what this ‘big picture’ is and how a lawyer’s role is determined by it.
Secondly, since most transactions involve many steps (and each step involves preparing a complex document / application or an approval form), so one needs to be really good with organizing things and presenting facts. There is a lot of communication involved with the parties so information needs to be presented accurately and in a simple manner which is not easy. Since missing out points can be problematic, making tables, step charts in a way that clients can understand, without vomiting legal provisions verbatim into your work, and explaining things in light of the client’s facts where possible becomes important. Accurate graphical presentation can require creative thinking – imagine representing 100 pages of information through a one-page summary. Those who do not understand the big picture usually end up thinking that this is clerical work.
We already looked at how step charts work in an earlier email. Let’s work a little on the big picture in this email.
The big picture on acquisitions and how it affects a corporate lawyer’s work
There are many ways to undertake an acquisition.
- Share acquisition – This involves acquisition of shares of the investee – it can be achieved through purchase shares from existing shareholders, through a share purchase agreement or by issuance of fresh shares, through a share subscription agreement, or a combination of both. In any case, entering into a separate shareholders agreement is essential to define the working of the company post the acquisition. After the transaction, articles of association of the investee company will also be required to be amended.
- Business transfer (slump sale) – This route involves acquisition of an entire line of business (including all the assets, liabilities and employees of that vertical), and is achieved through a business transfer agreement.
- Asset sale – This involves acquisition of specific assets only. This is achieved through an asset purchase agreement.
For example, due diligence on a business acquisition or purchase of specific assets will be different from a share acquisition. In a share sale, you will focus on ownership-related issues behind the shares and encumbrances (e.g. pledges) created on the shares. Who owns the shares? Is there any dispute to the title? In an asset sale, you will look at issues related to the specific assets are being acquired, and not the shares, since you will not acquire shares. A pledge with respect to the shares will not be relevant. As long as the seller owns the assets, there is no problem. (You may do a quick check to ensure that there is no restriction under the pledge agreement on selling the assets).
How does this impact your work? This means that you will actively look for a clause in documents pertaining to the company (which you conduct the due diligence upon) depending on the nature of the transaction.
Getting into the details of your role as a corporate lawyer
Research on the transaction structure
You will need to do some research work to understand how the transaction is structured and how money will be paid into India. If a foreigner is involved, foreign exchange regulations become important. Knowing how to use the RBI website to obtain different regulations and latest notifications is extremely important. You should be able to dig out the latest Master Circular on the subject and identify any subsequent notifications that have updated it (access this video explaining tricks on how you can get the most out of the RBI website, including finding master circulars).
Preparation of the due diligence checklist
M&A work is often misunderstood to be exclusively related to Companies Act and securities law – note that the ‘corporate’ section constitutes only one part of the due diligence report. You will also need to extensively go through labour, intellectual property, environment and any sectoral laws that apply to the business activity conducted by the company that is being acquired (e.g. insurance companies will require additional registrations under IRDA Act). Knowing how to identify relevant legislations is an important skills – associates at the firm prepare a customized checklist (from the nearest available template) requesting the company to forward relevant documents for the transaction being undertaken (you can access a sample checklist here). Note that for acquisition of listed companies, only publicly available information (need not necessarily be on Google) is taken (due to restrictions on insider trading), while for private companies you can request non-publicly available information as well.
Let’s move to the research aspects now.
#1 –Corporate and securities law issues
When you go through the corporate history of the company (through minutes of the shareholders meetings and board meetings), you will be identifying whether necessary shareholder or board approvals were taken, at least for major transactions.
Apart from corporate law issues involved in due diligence of the company’s past transactions, the transaction you are working on may also require shareholder or board level approvals. Refer to section 180, 185-186 of the Companies Act to see if a shareholder level approval is required – typically it is required for a major debt transaction, capital issuance, sale of business, a related party transaction or conflict of interest situation. Don’t worry if you can’t understand many of these terms for now – the purpose here is to explain what kind of work M&A lawyers do.
The investor wants to leverage and benefit from the acquisition, and would not want the investee company’s business to suffer because of the acquisition. You will be reviewing different kinds of key contracts of the investee company and identify if any of them require prior approval in the event of an ownership / control change over the investee, or report any red flags or other reasons that could trigger a termination by the other party due to the transaction. Some due diligence tools will help you through your corporate section:
- Ministry of Corporate Affairs website to find out all filings made by the company with the ROC (Registrar of Companies). The Ministry charges INR 50 per company whose filings you are looking for.
- You must know how to read the annual report of the company, as that contains a lot of information. You may also have to read some financial information.
- Listed companies file information with the stock exchange more frequently – knowing how to search the stock exchange website to obtain filings is crucial. Sometimes you will have to also research filings by other companies for similar transactions, to understand how disclosures are made to the exchange.
There may be departures from what you learn in theory – while Companies Act textbooks mention the doctrine of indoor management and constructive notice, at a practical level parties ensure that they have a copy of necessary resolutions or specific confirmations, so that there is minimal risk of dispute and litigation can be avoided.
As a corporate lawyer, you will make observations about any discrepancies or irregularities that you find out about in your due diligence report, and ‘action points’ to rectify the discrepancies.
#2 – Labour laws and employment issues
In an acquisition, labourand employment issues become important. You will look at necessary registrations and licences under Factories Act and other labour laws, to ensure they have been obtained and are currently valid. How will your review impact the report? Very simple – you will create an ‘observation’ in the report where you think they have expired, and suggest renewal as an ‘action point’. See the sample DD report to understand how.
- You will need to ensure that the acquisition does not amount to retrenchment under Industrial Disputes Act – retrenchment is not a convenient proposition under Indian labour laws.You will need to ensure that transfer of employees should happen in a way that it does not amount to a retrenchment
- Contracts of top executives will need to be scrutinized to identify if any severance payments are payable (especially in case the acquirer plans to fire them).
- Ensure that employee benefits(such as Provident Funds balance, etc.) can be as seamlessly transferred as possible.
#3 – Foreign exchange laws
If the acquirer is a foreigner, you will have to refer to the Foreign Exchange Management Act (FEMA) and its regulations. Most young lawyers initially struggle to identify which situations trigger the FEMA regulations – at one point of time even Indian banks such as ICICI and HDFC qualified as foreigners!
Pull out the latest consolidated foreign direct investment policy circular on the Directorate of Industrial Policy and Promotion (click to visit DIPP website). Many associates make the mistake of not checking the circular for consistency with the FEMA itself (sometimes discrepancies do creep in). Don’t just go blindly by the circular, and try to identify that they are consistent.
While going through the policy, be careful to make a note of all the relevant conditions in the policy, ranging from pricing, calculation of foreign investment and other conditions. For example, investment in real estate has a number of restrictions. In addition, go through sectoral regulations to see if the regulator permits foreign investment and on what terms. For example, if the investment is into an airline, look for regulations by Directorate General of Civil Aviation (DGCA).
#4 – Tax laws
Tax aspects typically involve stamp duty considerations, capital gains tax and indirect tax (sales tax and VAT) implications. Corporate lawyers largely spend their time on stamp duty, and transactions are often structured in a way that minimizes the impact of stamp duty. Impact of other taxes is often looked at by tax teams in corporate law firms, tax law firms or accountancy firms.
From an M&A perspective, stamp duty is applicable on the business transfer agreement, agreement to purchase assets, or on the share purchase / shareholders agreements and issuance of shares. Stamp duty costs can be quite significant – for example, in a 100 crore investment, a 3 percent stamp duty amounts to INR 3 crores. (The complete list of stamp duty on different transactions is specified in the relevant state Stamp Act – you can refer to the textbook by Krishnamurthy, which is a useful compendium of all the state acts.)
Capital gains tax–Purchase of shares or business assets attracts capital gains tax implications (capital gains is part of income tax). You may have to look at international tax treaties if a foreigner is involved – for example, in the event of sale of shares of an Indian company by one foreigner to another acquirer.
You will have to look at the capital gains tax provisions under Indian laws and identify if any exemption is available under a double tax avoidance treaty with India (see the list of treaties here). In case of asset purchases or business transfers, the impact of indirect tax laws is important. Look at the relevant State VAT Act to see if the transaction qualifies for an exemption from VAT.
- Contractual work in relation to the transaction
Drafting the contract is a key aspect. You don’t start from scratch typically – you are likely to use the nearest available template to prepare the first draft (unless the other side has prepared the first draft) and then customize it. Fresh associates may not be given the work of preparing a first draft immediately. Usually, the work involves substantive changes and some proof-reading and sanity checks.
You may have to make changes to some of the clauses based on discussions with the clients. Typically, clauses on representations and warranties, indemnity, conditions precedent, the issues on which investors want veto rights are hotly negotiated.
Here’s the catch – if you don’t know exactly how different clauses work or why they are written in a particular way, you are likely to find it difficult to modify clauses based on discussions with clients. You may also find yourself unable to provide suggestions on the mechanisms that should be specified in the contract for exercise of exit rights, such as a put option or a buy-back clause. For example, in which circumstance does an exit right trigger? In what manner should the shares be purchased by the company in the event of an exit?
Knowing contract law is one thing but real value can only be added if you can help clients on this, or get this done for your seniors without much need for supervision. If you don’t understand this right now, don’t worry – the point is to recognize how real-world work for which clients pay lawyers is.
Next, sanity checks and proof-reading is extremely important. For example, the definitions clause should not contain any definitions which have not been used in the contract (and which are a baggage from the template which you have chosen). There is massive amount of interlinking to different clauses within the agreement itself, so you need to ensure cross-referencing is correct. Numbering errors can make it difficult to understand the meaning of the document and also reflect poorly on the amount of care undertaken by the lawyer to do his work.
How do you go about preparing for this? A 6-point cheat sheet to build skills superfast and impress (don’t forget to print this out)
You may not have understood the concepts explained above, and may want to learn in more detail about others. We will get to that later. Most people do not realize the fact that the skills required to prepare for working in a corporate law firm are limited and can be acquired if you plan it out beforehand. You can be law-firm ready very quickly, irrespective of where you start from, if you learn systematically.
How do you develop these skills superfast? I have recently started taking a keen interest in mixed martial arts – when I asked my personal coach (and 3 other experts) on how to develop an intuitive ability while fighting, they advised me to visualize situations in my mind and try to imagine how I would tackle them. This method has direct application to corporate law as well, and can make you learn things very fast.
I’ll summarize the steps here. Whenever you read an M&A transaction, try to make a note of the following:
- Who is the acquirer? What is being acquired (assets, business line or shares)? Describe the investee company. What could be the possible business rationale behind the transaction?
- Create a list of issues that can arise in the transaction according to you. Use other news reports, blogs and stories to identify this.
- Identify what kinds of regulatory approvals will be required. Try to find out the sources of law (i.e. the regulations and notifications) which deal with those issues. Read and try to understand them.
Example: Consider that a US-based e-commerce store wants to incorporate an Indian subsidiary but continues to process payments from its offshore payment gateway – if this is the fact situation, you must be able to find out about the Uber controversy. Discussion at a general level is not enough – as a lawyer you must be able to trace RBI’s power to the source legislation and explain specifically how it flows from the Payment and Settlements Systems Act and its regulations (not the RBI Act).
- Are there instances of prior transactions that faced similar regulatory or contractual issues? How is this transaction different?
- Is there a recent ruling of a regulator on any of the issues? Try to read the whole judgment / order and understand it in light of the facts, and don’t just read the ratio alone. If necessary, prepare a diagram.
- Can you think of alternative ways in which the transaction can be undertaken to achieve the same commercial effect? [This is advanced stuff, but you’ll start getting this after some practice with the above 5 steps. It is more time-consuming and will require more ‘expert’ input, so be willing to discuss with seniors with far more experience.]
This should give you enough areas to talk about in interviews and engage the recruiter in a meaningful discussion, even if it is a senior partner.